Axios Pro: Health Tech Deals

January 04, 2023

Axios Pro Exclusive Content

Happy Hump Day, Health Tech readers.

❤️‍🩹 Situational awareness: GE has completed the separation of its health care business, and GE HealthCare Technologies starts trading on NASDAQ today.

1 big thing: Cash is king for health-tech M&A

Illustration of a giant health plus on top of a pile of cash, the ground underneath is cracking.

Illustration: Aïda Amer/Axios

Health-tech dealmaking this year will be characterized by more profit-focused investment playbooks, industry sources tell Claire.

Why it matters: Gone are the days of uber-frothy revenue exit multiples, as the market reset forces health tech companies and their investors to shift their mindsets.

What they’re saying: “Revenue multiples are more out of favor than they certainly were,” says THL managing director Josh Nelson.

  • “The 'rule of 40' should continue to be a guide for when SaaS revenue multiples will apply," says Mark Tomaino, operating partner at Welsh Carson Anderson & Stowe.
  • An asset’s gross margin profile will be more closely scrutinized in next year’s market, by all corners of the market, he says.
  • For early-stage, not-profitable digital health assets, investors like Alison Ryu of Able Partners spend increasing time mapping the evolution of gross margins.
  • “We don’t have years and years of data or pure quantitative proof of unit economics at the time of our first investment,” says Ryu, a partner at Able.

Yes, but: Health tech is “still a market driven by revenue multiples,” despite EBITDA multiples and other key performance indicators coming into play, says Kevin Eisele, co-head of equity capital markets for health care at William Blair.

Zoom in: Technology that automates health care workflows will be especially prized in today’s market, particularly amid an ongoing labor crisis.

  • “The most compelling value proposition is when you’re doing anything that helps with enhancing revenue," Tomaino says. "If you can show you’ve enhanced revenue, there is demonstrable ROI, you’ve effectively paid for your solution.”
  • “Technology is a powerful enabler in a challenging macro environment, where we see labor challenges, supply side constraints and inefficiencies across the provider universe, which have all been exacerbated by COVID,” Nelson says.

Meanwhile, pharma services technology offers compelling tailwinds as decentralized clinical trials gain traction following pandemic disruption of R&D, both Tomaino and Nelson say.

  • "The clinical trial data landscape will become increasingly fragmented and should drive demand for data management and interoperability solutions,” Tomaino says, noting that clinical data tends to be fragmented and disorganized.

Between the lines: Consumer-focused health has drawn interest and investor dollars in recent years, but the approach isn’t easy to nail, Nelson says.

  • "If the business model can’t demonstrate that tangible ROI, we’ll be more cautious," he says. "One of these areas is around the consumer — focusing on what they’re seeking, and how to measure and prove out the ROI.”
  • Able's Ryu says direct-to-consumer strategies are difficult to scale to profitability, but the firm has found success with B2C models.

The intrigue: Blair’s Eisele says that “while there aren’t a lot of public opportunities just yet, companies working in social determinants of health are going to be a focus in the sector.”

  • Two players come to mind: Cityblock, most recently valued at $6.3 billion, and Carbon Health, valued at $3 billion in 2021.

Editor's note: This story has been updated to clarify that Kevin Eisele is co-head of equity capital markets for health care at William Blair.

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